What is a Pegged Cryptocurrency?

Cryptocurrency enthusiasts are always at the mercy of price volatility. This is especially true for altcoins right now, although Bitcoin is also going through some violent swings of its own. Some projects have even tried to create a pegged cryptocurrency, although efforts have been mostly unsuccessful as well. There is a good reason as to why that is, though.

Pegged Cryptocurrencies Are Not Easy To Pull Off

As the name somewhat suggests, a pegged cryptocurrency indicates a coin, token, or asset issued on a blockchain that is linked to a specific value of a bank-issued currency. In most cases, these coins would be pegged to the US Dollar, as it is the one currency that dominates the entire financial sector. Tether has made some waves in this regard, as their USDT token is pegged to US$1 at all times.

It is vital to understand one cannot simply claim a coin or token is linked to the value of 1 US Dollar without enforcing this fact, though. To be more specific, the cryptocurrency project owners will need to have the specific amount of US Dollars in reserves at all times to guarantee the pegged value of their cryptocurrency. This becomes even more important when said cryptocurrency can be openly traded across multiple exchanges.

Holding vast amounts of US Dollars in reserve is one of the major challenges for pegged cryptocurrencies, though. There are ways to achieve this goal, either through investors or fundraising. The teams collect x amount of money and issue their number of tokens accordingly. However, this also means there will be no profit to be gained from buying or selling the currency since it will always have the same fiat currency value.

Even if the project would successfully maintain its 1:1 peg to the US Dollar for an extended period of time, they would face a new problem. Regulators do not take kindly to companies looking to link the value of a central bank-issued currency to something created out of thin air. It is safe to say one would need some specific paperwork – and potentially even licenses in most countries – to provide such a service. Additionally, the company needs to keep a public record of their assets at all times to ensure they have adequate reserves.

More importantly, there needs to be a decent enough demand for the pegged cryptocurrency to make it a worthwhile venture. This has been the downfall for quite a few projects attempting to guarantee such a service. Ziftr, for example, never gained much traction, despite their coins pegged to US$1. If the supply is greater than the demand, one would need very deep pockets to keep offering this service. Unfortunately, the money will dry up sooner or later in that case.

Even successful projects such as Tether run into problems of their own. Due to issues with their partner bank, they are unable to convert the pegged currency back to US Dollars for now. There are exchanges who provide a USDT/USD trading pair, yet the premium to convert back to USD is quite steep. All of this shows creating a pegged cryptocurrency is not evident by any means, and there will always be risks associated with doing so.

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About The Author

JP Buntinx is a FinTech and Bitcoin enthusiast living in Belgium. His passion for finance and technology made him one of the world's leading freelance Bitcoin writers, and he aims to achieve the same level of respect in the FinTech sector.

boblq

Is not the main issue leverage? How many dollars must Tether hold in reserve.

There may well be KYC advantages to Tether. What other advantages are there?

UltraParadigm

It’s a 1:1 relationship, meaning they have $1 in reserve for every USDT in existence. The conversion is actually about 1 Tether = 0.98USD. That’s the premium they are talking about in the article, which is pretty steep. However Coinbase also charges 2% to convert your bitcoins to dollars. The advantage here is that you don’t have to ever convert it to dollars. Trading between Bitcoin and Tether costs far less, usually a quarter of a percent. where as trading between Bitcoin and USD would eat at your profits/wealth at most exchanges.

Ilya Oleynick

NuBits is great! USD peg is strong and working. You can also “park” your nuButs in wallet and get ~50% APR intrest!!!

I Co

can the currencies be ‘pegged’ to gold, silver, power units, isotopes, and others?

Michael Wilterdink

any cryptocurrency claiming to be pegged to a certain value, or backed by an asset are scams… that’s one absolute in crypto, wish people would figure this out.. you can not peg cryptocurrency to a certain value, nor can you back it with an asset.. period, end of story. Anyone that says any differently is actively trying to scam you, or ignorant and falling for said scam…

Pippin

Hard pegs like you see in Tether an NuBits are doomed to fail, and have already done so. This is nothing special for crypto. You see the same in fiat. Allthough the pegs tend to hold a lot longer, they fail there too. Both in crypto and in fiat the problem is the same: Trying to maintain a value that is different than how the market would otherwise value the currency.
But hard pegs are not the only option! As a matter of fact, they are mostly outdated. Modern pegs are mostly constructed different. There is a wide variety of different pegs that do an excellent job providing stabillity, and stabillity is what pegging is all about at the end of the day.
BitBay will be the first crypto currency that offers a modern peg. It is called a rolling peg, and it will have a lot in common with what is called a crawling peg in fiat. The objective is not to freeze the value of Bay versus US$, but to reduce the volatiliity that we are accustomed to in crypto currencies. The peg will not rely on complicated and vulnarable constructions that basically are just made to provide buy and sell walls. BitBay’s peg will go to the root of the problem and regulate the supply to a level where it meets a healthy demand.